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I got my first credit card when I was a senior in college, way back in 1989. It was a Citibank Visa with a whopping $700 credit limit. I remember being thrilled to find out that one of the biggest banks in the world would actually give me credit, even though I had no income during the school year. How amazing!
Naturally, I promptly went to New York City on spring break and maxed it out. And then the calls started, and I learned about the fun of dealing with the collections department.
Fortunately, my dad bailed me out before I totally trashed my credit rating (thanks, Dad!), and after some fits and starts running up four-figure balances on other credit cards during my 20s, I eventually became a happy citizen of GoodCreditLand. But even now, a little part of me wonders what the heck the card issuers were thinking.
Of course, a much bigger part knows exactly what they were thinking: that my parents would bail me out. Most likely, years of data had shown them that the parents of students at my alma mater could be counted on to bail out kids who ran up big balances. So even though my parents didn't co-sign my card, from the card company's point of view, it was almost as if they had.
But that was 1989. Things are different now -- much different. Even in 1989, $700 wasn't that much money in the grand scheme of things. And the solicitations didn't start until my senior year, when there was a pretty good chance that I'd be employed within several months. Nowadays, on many campuses, students are bombarded with credit card offers from industry giants like Bank of America
The results are pretty much what you'd expect. A study done a few years back by consumer credit expert Robert D. Manning of the Rochester Institute of Technology found that three out of five students with credit cards -- often multiple cards -- maxed them out during their freshman year.
And how do they make the payments? It's not just the parents anymore -- Manning found that almost three-quarters of those students use their student loans to make credit card payments. The ranks of students graduating from college with four- or five-figure credit card balances are soaring.
If you're a parent of a college-bound teen, what can you do?
Keeping it real
"Talk to your teen" is an overused cliche these days. But really, there aren't a lot of other options. Offering your teen a co-signed credit card, a favorite "compromise" choice for some parents, won't limit your offspring's ability to get other cards you don't know about -- and it could damage your own credit rating if things get out of hand. I think it's better to trust your young adult and offer what wisdom you can.
Not sure what to say? Show your teen one of your own card statements. Explain how interest and fees work, and how a string of seemingly small purchases can add up to a sizable balance. Talk about late fees, and how quickly they can add up. Offer up some experience from your own history -- a time when you were late on payments, or carried a balance when money was tight, and explain what happened and how you handled it. Look at a few card offers, and point out the pros and cons of each, as well as the hidden costs. Work together to decide what kind of cards your child should get, and how they should be used.
But try not to lecture. Lessons are more likely to be taken to heart when they're offered as the fruit of experience, not just laid down as Mom's or Dad's rules. Offer support and coaching, but let them find their way. Odds are, they'll make a few mistakes but steer clear of serious trouble. And don't sweat those mistakes too much: That's how most of us learned, after all.
Want more information on the ups and downs of credit cards and credit reports? We've got two ways to help. Sit down with your teen and spend some time in the Fool's Credit Center, where we cover everything from the credit card companies' secrets to the Fool's Rules of Credit Management. Or give our personal finance newsletter, Motley Fool Green Light, a try free for 30 days to get even more hands-on hints about working with your kids.
Fool contributor John Rosevear does not own any of the stocks mentioned above. Bank of America and JP Morgan Chase are Income Investor recommendations. The Fool's disclosure policy is the coolest of Fool school tools.